Accuracy-Related
Penalties Are Seldom Considered Properly During Correspondence Audits

Issued on June 4, 2010

Highlights

Highlights of
Report Number:2010-30-059 to the Internal Revenue Service Commissioners for the Small
Business/Self-Employed Division and the Wage and
Investment Division.

IMPACT ON TAXPAYERS

The
accuracy-related penalty is designed to promote voluntary compliance by
imposing an economic cost on taxpayers who choose not to comply with the tax
law. Because penalties are not always considered
and applied when warranted, the Internal Revenue Service (IRS) may be missing opportunities
to further promote voluntary compliance and enhance revenue for the Department
of the Treasury.

WHY TIGTA DID THE AUDIT

This audit was initiated to determine whether the accuracy-related
penalty was assessed during correspondence audits in accordance with IRS
policies and procedures.The audit was
conducted as part of our Fiscal Year 2010 Annual Audit Plan and addresses the
major management challenge of Tax Compliance Initiatives.

WHAT
TIGTA FOUND

Despite an emphasis
on case file documentation and layers of management controls, additional steps
must be taken to ensure procedures are followed in considering and recommending
the accuracy-related penalty during correspondence audits.A review of a statistical sample of 229
correspondence audits closed in Fiscal Year 2008 found 211 (92 percent) audits for
which penalties were not considered and assessed in accordance with IRS
policies and procedures.

As a
result, opportunities may have been missed to promote compliance among an
estimated 1,851 taxpayers in the population reviewed and to enhance penalty and
interest revenue by an estimated $3.5 million.Because the audits reviewed were conducted through the mail, they did
not entail complicated areas of tax law. Each of the audits also resulted in the
taxpayer agreeing they owed additional taxes of at least $5,000.The $5,000 threshold is important because it
allowed TIGTA toreview
audits where examiners were required to consider assessing an accuracy-related
penalty.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the Director, Campus Compliance Services, Small Business/Self-Employed
Division, and the Director, Compliance, Wage and Investment Division, follow
through to ensure planned training is completed by all correspondence examiners
and their managers and that the training specifically addresses when the accuracy-related
penalty is applicable, how case files should be documented, and when managerial
approval is required.They should also require
managers and examiners to properly complete the accuracy-related penalty lead
sheets for all applicable audits.

IRS management agreed with the recommendations and plans
to take appropriate corrective actions.The Director, Campus Compliance Services, Small Business/Self-Employed
Division, and the Director, Compliance, Wage and Investment Division, plan to
conduct accuracy-related penalty training and emphasize managerial reviews for
penalty assertion/nonassertion.Also,
IRS management plans to submit a programming request to add the penalty lead
sheets to the Campus Report Generating System and ensure the accuracy-related
penalty is considered in Program Analysis System quality reviews.

READ THE
FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go to: